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End Of TPP Brings New Opportunities For China & U.S.

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 29, 2016

1. TPP is a Bad Deal & Trump is Right to Withdraw From It

2. With TPP Gone, China Will be Set to Dominate the Region

3. The Consequences of a Potential US-China Trade War

4. Trump Should Embrace Trade With China, Not Punish It

TPP is a Bad Deal & Trump is Right to Withdraw From It

President-elect Donald Trump promises that one of his very first actions when in office will be to withdraw the United States from the controversial Trans-Pacific Partnership (TPP), which was finalized earlier this year but must still be ratified by all of the participating nations.

The TPP, signed by 12 countries in February, encompasses 40% of the world’s economy. The member states are the US, Canada, Mexico, Japan, Australia, New Zealand, Malaysia, Vietnam, Singapore, Brunei, Chile and Peru. China was notably excluded from membership.

The supposed goal of the TPP was to deepen economic ties between these nations, slashing tariffs and fostering trade to boost growth. Members had also hoped to foster a closer relationship on economic policies and regulation. The agreement was designed to potentially create a new single market, something like that of the European Union.

Some clients and readers will recall that I was initially in favor of the TPP. The early analysis of the TPP sounded very positive, pro-free trade and could supposedly lead to millions of new jobs. Yet as more details on the agreement were made available, it became apparent that the TPP was a not-so-secret ploy to limit China’s growing dominance in the Pacific Rim region.

The TPP was also seen as intensifying competition between member countries’ labor forces. In fact, some critics argued that the TPP could actually result in lower wages over time. There are credible arguments now that the TPP will result in few new jobs, especially not in the US.

Others pointed out provisions within the TPP which would allow big companies to sue governments that change policy on important issues, especially those that favor state-provided services. Critics alleged that the TPP contained provisions that allowed member governments to implement sweeping changes without voters’ knowledge.

So the TPP came to be seen as just another trade deal that favored big corporations and the government sponsors. For all these reasons, I changed my opinion on the TPP earlier this year and no longer favor it.

If President Trump withdraws the US from the TPP, the deal likely falls apart. While it’s technically possible that the other nations could move forward without the US, Japan’s Prime Minister Shinzo Abe has said a TPP without the US – and its 250 million consumers – would be “meaningless.”

With TPP Gone, China Will be Set to Dominate the Region

The election of Donald Trump – assuming he follows through on his promise to withdraw from the TPP – could not have been better news for the economic and political ambitions of the Chinese government. On November 8, China’s President Xi Jinping learned that his country was about to become the unchallenged economic leader of perhaps half the world’s people.

While it is most disappointing that the TPP was designed to favor big corporations and member governments, as opposed to favoring workers and consumers, its likely death early next year will greatly benefit China for years to come. In fact, it’s happening already. Let me put it in context.

China map

Politically speaking, walking away from the TPP is almost cost-free for America. Economically, the United States was projected to gain only slightly in growth and jobs as a result of the deal, as was Canada. On the other hand, the people of Japan and Southeast Asian countries such as Vietnam and Malaysia were betting their very futures on it.

The TPP promised to improve the lives of hundreds of million people in the eastern hemisphere by clearing a tariff-clogged pathway between the world’s largest economies. Without it, they are solely dependent on China.

The response has been almost immediate: Days after the US election, countries leapt into action to make deals with China. Vietnam, Malaysia, Chile and Peru announced last week that they would turn away from the TPP deal and instead work on joining China’s 16-country trade partnership that it has been pursuing since it was denied membership in the TPP.

China’s new trade agreement – technically called the “Regional Comprehensive Economic Partnership” – is a less stringent pact that affects three billion people. Australia just announced plans to tighten its pacts with China, Japan, India and Southeast Asia (but not with the US).

And Beijing is preparing to step into the vacuum with an unprecedented bid to build a world economy around itself. China’s “One Belt, One Road” infrastructure-investment strategy resembles something like the Marshall Plan pursued by the United States after World War II.

Chinese-led institutions, including the newly created Infrastructure Investment Bank, have pledged to spend $1.2 trillion in 60 countries to create railway lines, oil and gas pipelines, highways, airports and major ports to link China with Central and Southeast Asia, Russia, parts of Europe and potentially much of Africa.

On top of that, China last week pledged to take over leadership of the global climate-change reduction effort and green-energy infrastructure – if the US follows Mr. Trump’s pledge to walk away from the Paris Climate Agreement – potentially making China a post-fossil-energy superpower over time.

In one sense, this is laughable in that China is the world’s largest polluter by far and continues to build coal-fired power plants. To think that it will be put in charge of global climate change initiatives is ridiculous! However, it is not out of the question to think that China could end up in charge of regional climate change for Asia at some point, given the power vacuum post-TPP.

During the US presidential campaign, many political commentators wondered whether the Chinese government favored Hillary Clinton or Donald Trump. There was never a doubt after Trump made it known he would withdraw the US from the TPP.

The Consequences of a Potential US-China Trade War

Throughout the presidential campaign, Donald Trump was repeatedly critical of China when it comes to trade. China is the fourth largest exporter to the US behind Canada, the EU and Mexico. In 2015, China exported $411 billion to the US or almost 20% of its total.

China’s economy is still heavily reliant upon exports, especially exports to the United States. Diminished returns from free trade will put increased pressure on China’s already weakened economy, and the likelihood of civil unrest in the country will increase.

China GDP Annual Growth Rate

During the campaign, Trump threatened to impose tariffs up to 35-40% on China’s exports to the US if their trade practices are deemed to be unfair. Most economists agree that this would be a bad decision and likely lead to a trade war, and I agree. Yet trump argued that trade with China has cost jobs and weakened US industry overall.

Since the 1970s and with significant market reforms, China’s economy transformed itself into an export machine. Although most Chinese were poor and couldn’t afford to buy much, they were willing to work long hours in factories for a fraction of the wages a US worker would earn. That transformed China into a base for the assembly of all kinds of products, from clothing to tools to iPhones, which then got exported to consumers in richer countries.

Yet today’s China looks very different. After decades of rapid growth, it is no longer a nation of poverty-stricken shop-floor workers. Gross Domestic Product Per Capita has surged more than 20 times in the past quarter century, to $8,141 in 2015.

China’s shoppers now rank among the world’s biggest spenders. Its retail market is expected to surpass the US for the first time in 2016. Its customers are a key source of new growth for American companies. General Motors sells more cars in China than it does in the US, while Apple gets roughly as much revenue from Greater China as from Europe.

And China’s consumers are just warming up. By one estimate, the Chinese middle class will reach 1 billion people by 2030. That means these wealthier Chinese will become more important to the global economy than American shoppers. One study estimates that by 2030, China will account for 18% of global spending by the middle class, compared to 7% for the US.

For American companies, tapping these new consumers would be a boon. Apple Chief Executive Officer Tim Cook has cited China’s growing middle class as a reason to be optimistic about his company’s future. Starbucks CEO Howard Schultz said recently that he plans to open 2,500 new coffee shops in China over the next five years. Boeing estimates that China will purchase more than $1 trillion worth of new planes over the next two decades to serve its growing middle class.

Do we really want to start a trade war with the second largest economy on the planet? Absolutely not! That would be economic suicide.

Trump Should Embrace Trade With China, Not Punish It

The big question is whether American companies will ever have fair and free access to those Chinese shoppers. China’s policy makers have placed restrictions on all kinds of US products, from the number of Hollywood films shown in China’s theaters to the amount of chicken served on Chinese dinner tables and on and on. They also promote state-owned and local companies over international competitors through subsidies and other support.

That’s why it should be a top priority for the US to pry open China’s markets and push for fairer treatment, not start a trade war. The US government has already been negotiating a bilateral investment treaty, which would help achieve those goals, and the Trump administration should pursue its completion.

Yet China expert Michael Shuman, author of “Confucius: And the World He Created,” believes President Trump should go even further in negotiating trade relations with China. Shuman believes the US should seriously consider an exclusive full-fledged free-trade pact with China as soon as possible in the new administration. And why not with the TPP headed for the ash heap?

Shuman cited a 2014 study by the Peterson Institute for International Economics which estimated that such an agreement could double American exports to China and create 1.7 million new jobs in the US over 10 years. It could also forge better relations between the world’s two largest economies and encourage better cooperation on a wide range of issues.

China might well be receptive to such a bilateral trade deal. President Xi Jinping has lately been talking a lot about further opening China’s doors to foreign business and promoting his own free-trade pact I discussed above. He understands that better access to foreign markets is ultimately in China’s self-interest.

Perhaps more crucially, the Peterson study argues that a free-trade pact with the US would help China improve its own productivity significantly – which it badly needs to do if it wants to sustain healthy growth in the future.

It’s impossible to predict what Trump’s China policy will be, of course. The hardball tactics he discussed during the campaign, such as hiking tariffs on Chinese imports and labeling the country a “currency manipulator,” are much more likely to close markets than to open them.

But there’s still reason for hope: Trump and his advisers have already been walking back much of his most inflammatory campaign rhetoric, and they’ve been pledging that his administration will pursue business-friendly policies.

It’s hard to imagine a deal that would do more to boost American companies over the long-term than a trade pact with China. And if there’s one thing Trump has been consistent on, it’s his belief in the “Art of the Deal.” Let’s hope his advisers are listening!

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Wishing you profits,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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